Chewy, Inc.

Hello, everyone, and welcome to the TUI Second Quarter 2025 Earnings Call. My name is Emily, and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do so by pressing Start, followed by the number 1 on your telephone keypad. I would now like to hand over to Natalie Nowak, Director of Investor Relations.

Natalie, please go ahead. Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh, and Will Billings, our Chief Accounting Officer and Interim Principal Financial Officer. Will is a respected leader with extensive finance and accounting experience, and we appreciate his dedication to Chewy as he takes on this expanded role while we continue to search for a permanent CFO. Our earnings release, which was filed with the SEC earlier today, has been posted to the investor relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at investor.chui.com. On our call today, we will be making forward-looking statements, including statements concerning CHUI's financial results and performance, industry trends, strategic initiatives, share repurchase program, and the environment in which we operate. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties, and other factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our FCC filings, including the section titled Risk Factors, in our most recent form 10-K for a discussion of these risks. Reported results should not be considered an indication of future performance. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We assume no obligation to update any forward-looking statements except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our investor relations website and in our earnings release. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2024. Finally, this call in its entirety is being webcast on our investor relations website. A replay of the audio webcast will also be available on our investor relations website shortly. And with that, I'd like to turn the call over to Sumit.

Thanks, Natalie, and good morning, everyone. Q2 net sales grew by nearly 9% year-over-year to $3.1 billion, exceeding the high end of our guidance range. Moreover, against an industry backdrop of low to mid-single-digit growth, Our Q2 performance demonstrates a clear share gain outcome. Strength of our Autoship program in categories such as consumables and health anchored Q2 net sales performance. Second quarter Autoship customer sales of $2.58 billion represented 83% of our Q2 net sales, reaching a new record high for the company. Growth in Autoship customer sales once again outpaced overall top line growth, increasing by nearly 15% in Q2. We are also pleased to see the continued strength within our hard goods business, which grew over 15% in the second quarter, primarily on the back of structural volume growth. And finally, a rapidly strengthening Chewy Plus program exceeded our expectations in the second quarter. I will comment more on our progress with this program in a moment moving to customers, we ended the second quarter with 20.9 million active customers reflecting 4.5% year over year growth. Importantly, the strength and quality of our new customers continue to improve. New customer Nespac for the Q2 2025 cohort strengthened quarter-over-quarter and is trending mid-single digits higher on a year-over-year basis relative to the comparable Q2 2024 cohort. For Total Chewy, we continued to expand customer share of wallet in the quarter with Nespac reaching $591, representing 4.6% year-over-year growth. Moving down the P&L to profitability, gross margin reached 30.4% in the quarter, expanding on both a sequential and year-over-year basis by nearly 80 and 90 basis points, respectively. For Q2, main drivers of gross margin were both our fast-growing sponsored ads business and favorable mix into premium categories. Pricing and promotion remained rational and did not have a material impact on gross margins in the second quarter. Continuing on the topic of profitability, we generated $183.3 million of adjusted EBITDA in the quarter, representing a 5.9% margin and a year-over-year increase of over 80 basis points. We also generated nearly $106 million of free cash flow in the quarter. Our robust profitability and compelling free cash flow generation enabled us to not only invest in our strategic growth initiatives, but also return meaningful capital to shareholders as reflected by the nearly $125 million we deployed towards share repurchases in the quarter. Now, I would like to provide an update on some of CHUI's strategic initiatives. The Chewy VetCare or CVC network continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits. We are consistently observing that CVC customers drive both the highest and fastest nest pack curves for Chewy. Additionally, we remain on track to open 8 to 10 new practices in fiscal year 2025 to reach a total count approaching 20 by year end, and we look forward to keeping you updated on our progress. Shifting gears, let's talk about CHUI Plus, our paid membership program. As a reminder, today CHUI Plus members receive the following benefits. Free shipping on all orders. 5% rewards to redeem on future orders, limited time seasonally relevant member exclusive offers, and a 30-day free trial period. At the end of the free trial period, members pay an introductory price of $49 per year and convert to paid members. As I shared in my remarks earlier, the CHUI Plus membership program is rapidly strengthening, indicating a strong product market fit. In the month of July, roughly 3% of Chewy's total monthly sales were to Chewy Plus members. Importantly, we are observing strong incrementality in spend, net pack, and positive contribution profit per customer across Chewy Plus customers compared to non-members. Furthermore, other key leading indicators of success are promising. These customers are buying at a higher frequency and attaching a higher number of products to their orders. Additionally, we are observing incremental auto-ship adoption and greater mobile app usage from Chewy Plus members relative to non-members. All of this is leading to both higher as well as accelerated net back curves for two plus customers compared to non members, which in turn is contributing positively to choose net sales flywheel. As we exit this year we expect approximately mid single digit percentage of our net sales to go through the tree plus Program. Further, we expect the program to generate positive gross profit dollars in fiscal 2025, though at a gross margin rate below CHUI overall, reflecting both the ramp that we anticipate in the second half of this year and the mix of paid versus free trial members. As we scale, we will remain disciplined in evaluating the program structure, including pricing and member benefits. Moving on, now let's talk about Chewy private brands. I am excited to share that in August, we launched Get Real, our new Chewy exclusive private brand of healthy, fresh dog food. The fresh and frozen segment represents a fast-growing TAM fueled by trends of humanization and premiumization in pet. Consumers believe that their pets deserve fresh and nutritious food, leading to longevity and an overall higher quality of life for their beloved pets. Get Real, a new line of minimally processed fresh dog food available only at Chewy, comes in three different pup-approved recipes, including chicken and Brussels sprouts, beef and sweet potato, and turkey and cranberry, All available as both full meals and meal toppers made with 10 or fewer ingredients plus vitamins and minerals. Additionally, this premium product is delivered to your doorstep in pre portioned ready to serve meals just talk and serve. Although the product has only been in market a few weeks customer reception is strong. customers are pleased with the palatability, quality, and overall experience, which includes shopping, delivery, and consumption. I am also pleased to share that we have already built up sufficient capacity through 2028 to support our growth in the fresh frozen segment broadly. both for Get Real and for our national brand partners, while remaining very much at the lower end of our previously set CapEx guidance range of between 1.5% to 2% of net sales. With the capital investment behind us, we are now in process of scaling to a national footprint by leveraging our existing fulfillment center topology. By the end of 2025, we expect to be ready to deliver a majority of our fresh food offering to customers within a one-day transit time. Furthermore, GetReal is exclusively an auto-ship subscription business that results in high gross profit per unit at scale, supporting both broad leverage across our operational infrastructure and our aspiration of becoming a leading profitable player in the fresh and frozen segment. While still early, we are pleased with the launch of this product and the positive response from our customers. Beyond Get Real, we are working on bringing other Chewy branded product innovation to market in the second half of 2025, and I look forward to keeping you updated on our progress. Before I turn the call over to Will, I would like to leave you with a few closing thoughts. The first half of 2025 has been an exciting and productive period for Chewy. reflecting the strength of our differentiated value proposition and the momentum across our business. Looking ahead, we expect the second half of the year to be even more dynamic given the evolving macro. As many retailers prepare to pass tariff-related costs on to customers, we believe Huey is well positioned to mitigate these pressures. Our higher mix of consumables and health and proactive investments in on shoring incremental discretionary inventory provide meaningful safeguards. These actions will help deliver a superior customer experience by selectively evaluating pricing, while protecting product margins. Additionally, instead of absorbing these pressures, we plan to lean into growth by investing behind the expansion of programs like Chewy Plus and our private brands. Customers are embracing these initiatives for their compelling value proposition, and we are equally encouraged by their strong return on investment. Overall, we see the second half of 2025 as an opportunity to further accelerate market share gains in the U.S. and position Chewy for even greater long-term success. With that, I will turn the call over to Will.

Thank you, Sumit, and thank you all for joining us today. Let's review our financial results and outlook. Second quarter net sales grew 8.6% year-over-year to $3.1 billion, exceeding the high end of the Q2 guidance range we provided last quarter. We reported second quarter gross margin of 30.4%, representing approximately 90 basis points of margin expansion year-over-year. Shifting to operating expenses, Q2 SG&A, excluding share-based compensation and related taxes, came in at $592.8 million, or 19.1%, of net sales, deleveraging approximately 30 basis points year over year. Q2 deleverage was driven by the ongoing ramp of our Houston Fulfillment Center, which launched in April, coupled with the wind down of certain shifts at our Dallas facility. We also incurred higher inbound inventory processing costs, primarily within hard goods, to ensure we have the right assortment for pet parents. as we head into the peak holiday periods, while also allowing us to mitigate impact from tariffs in 2025. Additionally, a smaller contribution came from increases in wage and benefit costs within the period. Importantly, we believe these increases are primarily temporary in nature, and we continue to expect to deliver modest SG&A leverage in fiscal year 2025. Second quarter advertising and marketing expense was $200.6 million, or 6.5% of net sales, in line with our expectations and consistent with our previously stated target of 6% to 7% of net sales. Q2 adjusted net income was $141.1 million, representing a 34.8% increase year over year, and we delivered $0.33 of adjusted diluted earnings per share within the guidance range we provided last quarter. Second quarter adjusted EBITDA came in at $183.3 million, representing a 5.9% adjusted EBITDA margin, which reflects 80 basis points of year-over-year margin expansion. We reported Q2 free cash flow of $105.9 million, which reflects $133.9 million of net cash provided by operating activities, and $28 million of capital expenditures. For full year 2025, we reiterate our expectation to convert approximately 80% of adjusted EBITDA to free cash flow, and CapEx will be at the low end of our previously stated range of 1.5% to 2% of net sales. In the second quarter, we repurchased approximately 3 million shares for a total of approximately $125 million. At the end of Q2, we had $359.8 million of remaining capacity under our existing program for future repurchases. We ended the quarter with approximately $592 million in cash and cash equivalents, and we remained debt-free. with an overall liquidity position of approximately $1.4 billion. Now I'd like to discuss our third quarter and full year 2025 outlook. We expect third quarter 2025 net sales of between 3.07 and 3.1 billion, or approximately 7% to 8% year-over-year growth. And we are raising and narrowing our full year 2025 net sales outlook to between $12.5 and $12.6 billion, or approximately 7% to 8% year-over-year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024. This represents a $175 million increase to the midpoint of our guidance range. Moving to profitability guidance, We are maintaining our full year 2025 adjusted EBITDA margin outlook of 5.4% to 5.7%. As Sumit shared in his remarks, we believe it is prudent to remain on the offense in the second half of 2025 and invest to strengthen Chewy's share position in the pet category. The midpoint of our guidance range indicates 75 basis points of adjusted EBITDA margin expansion year over year. Furthermore, at the midpoint of our 2025 net sales and adjusted EBITDA margin guidance ranges, we expect to deliver approximately 15% adjusted EBITDA flow through for the year, in line with our previously stated long-term target. Importantly, and consistent with our comments last quarter, we continue to expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin, confirming that we expect to continue to deliver healthy gross margin expansion year over year in fiscal 2025, with Q2 being the high point for the year. And finally, we also expect Q3 adjusted diluted earnings per share in the range of 28 to 33 cents. For the full year 2025, we are also reiterating our previously stated expectations related to share-based compensation expense, including related taxes of approximately $315 million, and weighted average diluted shares outstanding of approximately $430 million, 2025 net interest income of approximately $25 to $30 million, and we continue to expect our effective tax rate to be between 20% to 22% for 2025. Before we open the call for questions, I'd like to reiterate that our strong Q2 results underscore the continued momentum in the business and strength of execution by our CHUI team members. We believe that CHUI remains exceptionally well positioned to continue to deliver share gaining growth and enhance shareholder value. With that, I will turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing Start followed by the number 1 on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press Start followed by 2 to withdraw yourself from the queue. Our first question today comes from Doug Anmouth with JP Morgan. Please go ahead. Your line is now open.

Thanks so much for taking the questions. Sumit, can you talk more about the investments that are required in the back half and into 2026, just as you lean into growth? You know, a little bit more detail on those. And then also just how are you promoting and increasing awareness of some of the new offerings like Chewy Plus and Get Real? Thanks.

Hey, Doug. Good morning. So let's start with the second question first, because it'll give you a sense for the investments that we're thinking about. So, you know, as you know, we have a very large base of customers, which continues to grow. This customer base is sticky. And the programs like Chewy Plus, you know, allow us to enhance the process of discoverability and get customers to attach, both explore, discover, and then attach even a greater set of product or a greater range of products and services offered by Chewy. So, you know, our first attack strategy is to essentially expose Chewy Plus to existing members and so far we have not spent any incremental dollar on marketing the program externally and we don't intend to do so uh you know as we ramp the program up we're seeing really good participation of existing chewy members converting to become chewy plus members so the marginal cost of that acquisition is zero or nearly zero to us and most of the exposure is being provided by on-site and funnel shopping experiences Now coming to Get Real, our approach is very similar. You know, a large audience. We have, you know, what we believe really good recognition of what looks like premium cohorts and consumables for us. You know, so our strategy is much more leaning into the broader value proposition of Chewy externally as, you know, the place, you know, which is a destination for you to take care of your pets and providing, you know, food supplies, health, and other services. and really gearing ourselves for conversion rather than consideration building when customers come to our website. And so from that standpoint, the inputs that we've been really focused on is getting the quality of the product, the palatability of the product exactly where we want it. And we're pleased to see the customer response. Number two, we're price competitive. There are many products out there that are priced much higher. And we believe the value prop or the balance of quality and price that we deliver really passes good value to the consumer. Third, if you explore this product in the way that we've built it, this is not a standard product listing page experience. We've built a curated experience that allows customers to engage with this category in a manner that it allows them to seek the education, have the content at their fingertips. We've paired that up with really high CRM capability internally And that will be our strategy moving forward as well. So from that standpoint, you shouldn't expect us to lean very heavily in marketing dollars. Currently, we're pairing GetReal with a strong acquisition offer. But candidly, get real customers or fresh and frozen customers or high nest pack customers, you're looking at, you know, plus $2,500 spend for full meal customers and, you know, running into the high hundreds for topper customers. But these customers are also really propense towards health and wellness and other high spend categories. So broadly, we see tremendous potential for this category being the highest gross profit per unit category in the company. The fact that we've already spent the money in building CapEx or capacity should essentially make you comfortable to the point that we don't have incremental CapEx investments coming up through 2028. Of course, if the program exceeds our expectation in a major manner, then that's a high-quality problem to have, and we'll talk about it at that particular point. But broadly speaking, these are high-margin, high-sales, high-margin verticals. And we're excited to be finally leaning into them and driving even stronger nest pack consolidation.

Great. Thank you.

Thank you. Our next question comes from Nathan Feather with Morgan Stanley. Please go ahead, Nathan.

Thank you for taking my question, and I think that's encouraging momentum here. I want to do a question on the SG&A de-leverage. Any way to put some guardrails on the magnitude of temporary costs here and how much maybe we can attribute to some of the FC changes versus the hard-hit processing costs? And because of that, how should we think about the leverage path into the back half?

Thank you. Yeah, yeah. Nathan, let me provide broader commentary on SG&A and also answer your question very specifically. First of all, as we discussed on the call, we expect roughly 60% of our adjusted EBITDA margin expansion to come from gross margin and 40% to come from OPEX leverage. So we do expect to deliver SG&A leverage in 2025. And by inference of our first half performance, you can expect that that leverage will come in the back half of the year. Number two, you know, yes, the amount of SG&A leverage on a year-over-year basis in 25 will be lower than 24. But I think that's the ebb and flow of SG&A, right? Let me kind of elaborate on that a bit. So, you know, this will ebb and flow in cycles a bit. As we elaborated in our Capital Markets Day in December 23, we set a target of roughly 200 basis points to deliver. So far, roughly two years out, we've already delivered 100 basis points or 50% of that target. The majority of that leverage has come from us ramping four fulfillment sites, which are automated 2G sites and roughly flowing, you know, 40 plus percent of the volume through these states of automation within the company, right? By Q2 of next year, we expect nearly 50% of our volume will be automated, especially as Houston ramps up. Now, let me talk about the specifics in the quarter. So there's a couple of things that are happening in the quarter and in 25, right? So A, we launched Houston in April of this year, and it takes roughly six months for a Gen 2 facility to ramp sufficiently to start delivering leverage. And I went back and checked my notes from Q1, and perhaps we should have been a little more clear on that point up front, right? So this facility is ramping well. It's ramping as expected, but it takes about six months for a Gen 2 facility to ramp for it to deliver sufficient leverage. As such, we do expect to see leverage out of the facility beginning the second half of this year. Now, the second thing that's going on in SG&A is, look, the faster we grow in 2025, and as you can infer, we're growing purely on the basis of units. It's structural growth, which is comping first half growth where we had pricing benefit. And so what you'll see is that SG&A, that is a variable cost element, right, will essentially be enhanced the faster we grow on the basis of units. But that's a high-quality problem to have because it builds density. It allows us to extract more cost out and get the economies of scale as our facilities fully ramp up. So, again, that's a transitory thing, and we expect this to be a lot easier and better as we step out from 25 into 26. Now let's talk about the one-time elements. So we picked up incremental inventory in hard goods, because as you can see from the commentary in the market, prices are expected to rise in the back half of the year, right? And so we wanted to both shore up the inventory to deliver an immaculate customer experience from an in-stock point of view. But you know what? We might invest in price, right? We may invest in price to take share while everybody else is raising price. Chewy becomes, you know, another destination for pet parents to really extract the maximum value. So, you know, temporarily we believe this is a situation which is opportunistic and we should lean in and improve our share position. You talked about, you know, and so roughly we spent about, you know, $3 to $5 million in this particular element in higher inbound processing cost, right? And, you know, the last component that we talked about in the script was higher wages and benefits and higher wages and expenses, you know, which was a smaller, you know, element which is sometimes cyclical And that was about $2 million to $3 million per se. So, you know, the important takeaway is that you can expect SG&A costs to moderate in the back half of the year relative to the first half, and we expect to deliver SG&A leverage in 25.

Thank you.

Thank you. Our next question comes from David Bellinger with Mizuho. Please go ahead. Your line is now open.

Hey, everyone. Good morning. Thanks for the questions. Let's just squeeze a few together here. Maybe we could just start on the Q2 gross margin improvement. You mentioned the premium products. That seemed like somewhat of a shift. Also, maybe talking about some of this price investment in the back half. So can you unpack all that for us and how we should think about the drivers of gross margin expansion in Q3 and Q4? And then also just on the new OPEX investments, Can you help us understand, is all of this fully in your control and making decisions to further accelerate the top line and share gains versus something more reactionary or something changing in the external marketplace that is forcing you to do this? Just help us understand that split and how QE plus and fresh and frozen, this might impact the 15% incremental EBITDA margins for the business.

Sure. It's a good question. Let's dive into it. There's a couple of questions built into that, so let's pair them apart. So gross margin first. We're pleased with the gross margin expansion that we've delivered this quarter, right? And the drivers of gross margin, they have remained very consistent over the past few quarters and overall in line with our story or the narrative that we've brought to the street, right? They include product mix across our merchandising-led businesses. So you've heard us talk about health, premium consumables, now hard goods is starting to, you know, grow double digit, albeit a smaller contribution, but still we're encouraged to see kind of where this goes. So that's kind of why we use the word product mix across merchandising-led businesses, because it isn't just pharmacy, which has continued to contribute. It is, you know, health and wellness supplements, it's premium consumables, you know, it's hard goods growth, et cetera, et cetera, et cetera. So number two, so the drivers of GrowSmart include product mix across merchandising-led businesses, increasing ownership penetration and scale that provides economies of scale, and our ramping sponsored ads initiative. So that's very consistent commentary. For Q2, the promotional environment remained highly rational. And we don't expect the promotional environment to be irrational in the back half of the year. So as Will mentioned in his remarks, Q2 represents the high point of gross margin for the year. And I especially want to note that gross margin will fluctuate on a quarterly basis. And that will be helpful to remember. This is the case because while we pride ourselves on being disciplined, we also pride ourselves in being able to run the business dynamically each quarter. So, for example, we will lean into opportunities where we believe Chewy will benefit long-term. For instance, we may lean into auto ship subscription growth if we're seeing the right conditions and signals from our marketing teams. Or on the program ramp, supplier ramp, The ramp of phasing the suppliers and sponsored ads may lead to one quarter being more meaningful than the other in terms of contribution. The important point to remember for 2025 and in general is that we plan on delivering a healthy level of gross margin expansion on an annualized basis. So specific to 2025, if you recall our guidance, we expect approximately 60% of 2025 EBITDA margin expansion to come from gross margins. So clearly the inferring here is that we do expect to deliver meaningful gross margin expansion this year as well. So where are we investing in the back half? So if you look at our guidance, I'll just sort of like plain map it out for us, right? At the midpoint, our guidance is expanding by roughly $175 million. You know, 15% of flow-through, you'd expect probably an incremental $20, $25 million to flow through the bottom line, but we're choosing, right, to invest that back into the growth of the company, whether that's growing the Chewy Plus membership program that we believe is going to be super incremental, and part of that incrementality is reflected in our top-line guidance, or whether it's, you know, continuing to grow our ship stronger, or whether it's opportunistically evaluating the market in the back half and seeing if there is selective pricing lean in opportunity. If there isn't, then great, we'll take it to the bottom line. But we've sort of left ourselves open to play the marketplace, and SG&A, structurally, this is all within our control. So these are two different things that are happening in the way that we will invest in the growth of the business and the SG&A story, which is a very standardized, certain one-time elements, but generally the ramp up our fulfillment facility.

Great. Thank you very much.

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

good morning and thanks for taking my question so just going back to your get real and some of your fresh pros and efforts um at this juncture how how big do you think the business can go over time and then you know i know it's early but just any characteristics of the initial customers that you're you're getting into the franchise and in this sense are you getting sense of give a sense of whether you're actually getting new customers just given given that launch sure yeah so if we look at the cam of the category today we believe it's somewhere in the three billion dollar four billion dollar range

and over the next several years we expect this category to be north of eight billion dollars so somewhere in the eight to twelve billion dollar range the category is growing in at mid-teens levels it was growing faster up until last year now it's growing at mid-teens level and that's a really healthy growth rate for us to be able to get excited about right number three number three there is a lot of interest in this category from around the industry. You've seen some de novo players already leaning in. You've seen national branded players start announcing their announcements or their product offerings. We're really excited to be partnering with the national branded partners as they bring their products to life in the back half of this year. And alongside that, get real, we expect to have a meaningful amount of share as the category grows. What is meaningful? We would consider roughly a share position, commensurate to choose share position in the industry to be a meaningful share outcome. Now, given that we've built the capacity, given that we've built the topology to be a one-day network, And given the sophistication that we have in our supply chain, we expect the high gross margin possibility of the vertical to efficiently translate into high EBITDA as well. And alongside, you asked about the quality of the customer. Let me answer that now. So far, it's early days. We've been at it, what, less than four weeks, five weeks, and so far we're seeing roughly 70% of the customers are existing customers, 30% of the customers are net new customers. And that is, as my earlier comments to Doug indicated, we'd expect that. So we're benefiting from the general traffic that the industry will create in marketing the product, and we are priming ourselves for conversion using our site experience with Get Real. We'd expect the NASDAQ of this customer to be north of, you know, $800 for toppers because we believe they will attach two or three more categories. And for full meals, we expect this to be, you know, a plus $2,500 customer on an annual basis. So we're excited about it.

Great. Thank you for all the color. Best of luck. Sure.

Thank you. The next question comes from Curtis Nagel with Bank of America. Please go ahead. your line is now open. Please proceed with your question. We are not receiving a response, and so I will move on to the next question, which comes from the line of Shweta Karjuria with Wolf Research. Please go ahead. Your line is now open.

Okay. Thanks a lot for taking my questions. Let me try two, please. Sumit, could you please talk about the advertising environment, just the conversations you've had through the quarter, and what is top of mind across advertisers as we think about the back half of this year and potentially even next year, and how It is and how ad revenue is trending or I guess advertising business not revenue is trending for you versus your expectations. And then the second question. Is generally what what are your expectations as we think about the macro in terms of net household formations for the remainder of this year and also next year? And I ask because there could be inflationary pressure. So how are you thinking about the the mix of? customer growth versus pricing, do you still expect it to be, call it low to mid single legit percentage growth rate in the back half, or is there potential for acceleration in the back half of this year? Thanks a lot.

Okay. There are three questions there. State of the industry and key inputs, our composition of new customers and NASPAC, and then three, advertising. So let's take them one by one.

Exactly.

So in terms of the in terms of the lay of the land uh so let's start with pet household formation trends overall you know the trends that we spoke about last several quarters have remained consistent and we're not seeing notable changes relative to those comments right with respect to data or the shelter channel net adoptions remain stable and relinquishments continue to trend down year over year and so overall we expect pet households to be broadly flat to slightly up in 2025. So the point on industry continues to normalize seems to be holding true. Now, across the conversations that we're having with our suppliers and interpreting the market from a consumer standpoint, we believe the back half of the year or generally for 2025, the industry remains in low single digit to kind of perhaps the low end of the mid single digit range in terms of growth. And so, you know, we are clearly taking share, growing on a 52-week basis between 7% and 8% and 53-week basis, the 6% range or so, which we're excited about. And this is on top of the fact that we have tougher comps that we're comping as we move into the back half of the year. So we're excited about that. Now let's talk about our composition. So, you know, our growth algorithm, as we've guided long-term, is a combination of Active customers growing low single digit to mid single digit and NESPAC growing mid single digits, right? And so we're pleased to essentially maintain that for the rest of the year. We're encouraged by the steady and consistent return to active customer growth that we have delivered over the past several quarters, and we expect that to continue on a sequential basis, right? Would remind you that we will be lapping our return to active customer growth in Q4, which will result in modestly tougher comps for us in Q4. And even with the tougher comps, we continue to expect to grow active customers at the high end of the low single digit range in 2025, right? And then when you look at nest pack, we delivered four and a half percent growth in Q2 that is in a normalized environment, you know, which would where, where there is some pricing benefit right now, there is no pricing or no material pricing benefit flowing through. So we're growing nest pack at four and a half percent, and we would expect right nest pack to continue to trend in that four and a half to five, five and a half percent range as we move into the back half. And again, this is through stronger auto-ship stronger product mix. You know, programs like Chewy Plus that are driving consolidation. So it makes a lot of sense for us to lean in and continue to capitalize on the growth that we're seeing. And then your final question on advertising. You know, the market competitive intensity is high. You know, we don't see generally from a lean-in point of view either suppliers nor, you know, competitors lean out. So competitive intensity remains high. You know, we are really pleased with the metrics that we are seeing on our side. For example, our net traffic was up 14% in the quarter, you know, number of sessions. And then on the mobile app side, right, sessions were up over 25% year-over-year. And so broadly speaking, we're attracting, you know, customers, and we like that translation layer. uh when we think about sponsored ads that continues to resonate uh you know really loudly uh and we feel good about the continued progress that the business made on at this quarter which again uh you know grew sequentially uh and we have strong conviction in our long-term target of the one to three percent uh that we have brought to the table okay that's helpful thanks for that sure

Thank you. Our next question comes from Michael Morton with Towers. Michael, please go ahead.

Good morning. This question is for Sumit. A bigger picture and then maybe a more near-term one. But Turing has done an excellent job kind of disproving the fears around competing with retail giants. And though the obvious competitive advantages like customer service But we were wondering if you could maybe speak to some of the aspects that are missed by us on the outside where you think your real opportunity is to continue gaining incremental share. And then maybe just internally how this is reflected in your outlook as pet household formation continues to improve. And then just on the hard goods recovery, maybe just a little bit details on volume versus ASP would be helpful. Thanks again.

So let's start with the second question. It's all primarily volume. There is very little ASP benefit right now in the hard goods recovery. The primary drivers of hard goods recovery are, as you heard me talk about last quarter, I will reiterate that, a rapid acceleration and expansion of uh in stock uh you know higher insta so more products for customers to choose from uh we've onboarded over 1500 brands this year already and customer reception on the freshness of that inventory is uh really encouraging for us to see number two our in-stock levels have remained really high and we want to keep them high and hence the investment in in inventory in q2 as we move into the back half of the year uh number three uh you know continued exposure for hard goods customers in the way that we're communicating with them both on-site and off-site. And so overall we're encouraged by what we are seeing in hard goods and don't expect it to slow down as we've played Q3 so far. So good story there. And then your met up, your higher order question around differentiation and Look, we really always interpreted the playing field as much broader than food and supplies. And when you essentially interpret $140, $150 billion TAM, which is increasingly online, the value prop that we are bringing to the market, which is credibly connecting food supplies, the entire health ecosystem alongside B2C, B2B, or B2B2C type services options. And then really keeping customers in our funnel and building that layer cake. We do it, in my opinion, in one of the most efficient and powerful ways relative to anybody out there. And so there are reasons for that, right? So in the In the food and supply side, you would think that we are a scaled e-commerce player, but with the personalized service you would expect in a local neighborhood pet store. And that combination is very hard to achieve. And we continue to achieve and outperform and are never satisfied with our performance when you think about it at the scale that we're operating. Then next to it, we've stood up a very large and compelling health TAM which now we're playing in nearly 100% of the $50 billion health TAM that is growing at two times the rate of food and supplies. And within that, we've built a very credible set of offerings. So whether it's, you know, the fact that less than a fourth of our customers are interacting through, you know, verticals like pharmacy, which gives us tremendous headroom to continue to grow in pharmacy, particularly as the vertical continues to move more and more online. or whether it's the growth of our compounding business. You know, we haven't talked about compounding for a while. The gross margin, the compounding, there's only two credible compounders in the country, and we, you know, stepped into compounding to offer the first B2C offering for customers, but we're also becoming a more and more choice product for veterinarians who want to lean into compounding services. And the gross margins for compounding are even higher than gross margins for pharmacy, and the barriers to entry are really high. Next to it, we built a very credible B2C and B2B software business, which continues to ramp. And so broadly speaking, and now with CVC ramping higher than expectation, it's only excitement that we can sort of project moving in the future. Chewy Plus is a program we're excited about, and that's why we believe it was important to inform you that the program's quickly ramped up. to become 3% of net sales exiting, you know, the last month of the last quarter. And we expect it to continue, right? We see this program in line with an Amazon Prime or Costco membership or Walmart Plus, you know, with similar benefits and similar returns. And so our job is to position it as the best, you know, pet membership program in the industry. We're excited about that. So there's lots in front of us that allows us to compete. you know, without really being concerned about competitive intensity. You know, that's always, you know, we are observant of that, but we really obsess over our customers.

Thank you.

Thank you. We have time for one final question. And so our last question today comes from the line of Dylan Carden with William Blair. Dylan, please go ahead.

Thanks. Sumit, curious, you had some earlier comments about sort of the quality of cohorts improving year over year. And I was just wondering if you could elaborate on that. Is that just sort of simply the industry itself stabilizing, improving? Are you doing things to kind of stimulate that? And the growth, maybe it's sort of a related topic, but the growth in auto ship and the outperformance there, which has been relatively sustained over the last three quarters, you know, how long do you think that runs? Thanks.

So the quality of the cohorts improving is a result of two different things, Dylan, and they're both complementing us. One is the more customers we push into programs like Autoship or bring in through programs like Chewy Plus, the more our ability to keep them in the funnel, you know, get them more opportunities we have to talk to them to get them to consolidate their NESPAC, and the faster NESPAC consolidation that we see from them. So within the program itself, then we have worked towards improving settlement rates. So for example, if you think about auto-ship, it's a two-sided funnel, right? We're bringing in growth subscription, and then we're retaining net subscribers. So we've improved both. Our rate of growth subscription add to auto-ship has increased, and our second order, third order, fourth order settlement rates into auto-ships has improved, which then means that the net retention in auto-ship is much better. And you see that layer cake building pretty effectively, you know, that continues to push a greater portion of our sales moving through ownership. With Chewy Plus, we're seeing a similar effect, right? Chewy Plus members are engaging with and adding, on an average, three more categories than non-members to their baskets, right? And the mix of cohort is really interesting to us because it opens up Chewy to all of the low spending cohorts where we can rapidly consolidate baskets. And it's opening us up for high spend cohorts to expand and discover other products which are also expanding basket size. So on an average, we see really strong incrementality and the quality of cohorts of the Chewy Plus program is healthy. then we have a large and growing health business and a premium consumables business. Remember, every time I've talked about this in the past, we've mentioned that when it comes to the low-end value segment of the market, which is roughly, in our opinion, 12% of the market or customers, that's likely not the place for Chewy, but everybody else, Chewy is the place. And then the final thing is more and more people move in online So clearly, you know, online is consolidating share from offline. And, you know, once we lock these customers in, which we were, you know, not doing as well, in my opinion, in 22, 23, you know, you're seeing the results sort of come through here.

Thanks. And just curious, you know, Chewy Plus, I get that it's early days as far as sort of mid-single digit revenue penetration. But, you know, for a lot of loyalty programs, you mentioned Prime. That's kind of the majority of the business. Is that part of the intention here? And just from a margin standpoint, you know, let's assume it's the majority of the business. That would be margin accretive?

So, look, I mean, you know, I think we've shared this stat in the past that, you know, at some point we did the survey not so long ago, three-fourths of our customers are prime members, right? And so I think that's probably well understood given how broad the penetration of that program is. But candidly, what we're observing is, you know, what we've also shared in the past is that our generally it is well understood that we retain a very high percentage of our customers from going into year two. Right. And so our attrition is de minimis. past kind of a 30-month mark. And you saw that in the way that our pandemic cohorts have settled out, right? And so what happens is that once we have a customer past the 30-month mark, in the past, right, they would rapidly consolidate their share of wallet over to Chewy, right, regardless of whether they're a Prime member or not. And now with Chewy Plus, we're seeing that that consolidation is happening even faster, right? With Autoship, we're seeing that that consolidation happens even faster because we've improved the proposition on the Autoship program itself. So that was my point on why we're seeing both accelerated as well as credibly built NASPAC curves on the back of these two programs. And then your other question was around margin. Yeah, we expect 2E Plus to be margin accretive. So as the program ramps, obviously we're leaning in into the 30-day free trial period. There's the mix-off, new members to paid members. It'll take a few months for the NASPAC consolidation to start coming through. But broadly so, yes, the program will be gross margin rate dilutive, but on a dollar basis, it will be highly accretive, and on a contribution profit basis, it will be highly accretive. And so I think you would essentially underwrite a business case where if we came to you and said, hey, we're investing X basis points, but we get 6X the return in top line, okay, I think that ROAS is something that we would underwrite.

Yes, I really appreciate it. Thank you.

Thank you. Those are all the questions we have time for today and so this concludes our call. Thank you all for your participation. You may now disconnect your lines.